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Demonetisation update 24 – voice of Dr. Y.V. Reddy

Extracts from the transcript of Dr. Y.V. Reddy’s interview with CNBC-TV 18

Q: Do you think demonetisation was the right way to attack black money? Do you think the pain equals the gain?

A: If I have to be analytical, conceptual, academic and not ex governor, the way I look at it is from a practical point of view, the pain has happened, going forward to the extent possible we would quickly relieve the pain. More important is gain, how do you maximise the gain? In that sense therefore I would say this is the beginning of handling the problem of black money. In a way you have done a lot, gone through the pain and to handle the problem which is a complex problem where both the administration, the incentive mechanism, the judicial mechanism, the legal mechanism are outdated for a modern economy. Then the inappropriate policies. I will give you an example – gold smuggling – huge black money was produced because you had an unrealistic policy of gold. So, you have to look at unrealistic policies, unrealistic law. You have increased punishment but ineffective because it is never implemented.

Q: If you were governor, would you advise demonetisation?

A: At this point I would say why are you asking me now? I would rather say you ask me what we should do now. The way I would look at it is what will be done from now on, there is lot more to be done. Blackmoney is a result of several factors. The most important being there are two actors, one is the administration, other is the people who are indulging in blackmoney. Unless both are in some ways colluding it won’t happen. Now if you say that I am fighting blackmoney and I empower the people, administration then in a way you are weakening one party and strengthening the other party. So, if there are two factors then the attack should be simultaneous, symmetrical and synchronised. Therefore what I am saying is the next step should be how do you look at the whole issue of governance, effective deterrence, appropriate incentives?

Q: So attack the corruption on the role of blackmoney in the polity and bureaucracy as well?

A: Yes and judiciary.

Q: Accept political donations only by cheque, is that your point?

A: That is one part, whether it is Rs 1 or Rs 20000 it doesn’t matter but that is one part. For instance the idea that you should reduce the taxes is ridiculous because our is lowest tax in the world from similar countries. We don’t have inheritance tax, tax rates are lower than USA, Britain. There is no major economy in the world which has as low tax rates as India. So, it is a problem of compliance, it is a problem of fairness. People in India think that the way the tax is administered is not fair. So, it is not a question of lower or higher taxes or the functioning of the government – the money that is being spent by the government is being misspent. So, there are bigger problems. Similarly judiciary, there is no judicial redressal, there is no contract enforcement. My point is that the black money handling cannot be solved simply by destroying cash, it is a bigger problem. If this is the beginning of all that problem then it is worthwhile otherwise the pain will remain and the gain becomes illusive. [Link]